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UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION
INVESTMENT COMPANY ACT OF 1940
Release No. 21783 / February 27, 1996
ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 763 / February 27, 1996
ADMINISTRATIVE PROCEEDING
File No. 3-8845
______________________________
: ORDER MAKING
In the Matter of : FINDINGS AND IMPOSING
: SANCTIONS PURSUANT TO
R. MARVIN MEARS : SECTION 9(b) OF THE
: INVESTMENT COMPANY
: ACT OF 1940
:
:
______________________________:
I.
The Securities and Exchange Commission ("Commission") has
instituted an administrative proceeding pursuant to Section 9(b)
of the Investment Company Act of 1940 ("Investment Company Act").
-[1]-
R. Marvin Mears ("Mears") has submitted an Offer of Settlement
("Offer") which the Commission has determined is in the public
interest to accept.
II.
Solely for the purpose of this proceeding and any other
proceeding brought by or on behalf of the Commission or to which
the Commission is a party, Mears admits the jurisdiction of the
Commission over him and the subject matter of this administrative
proceeding, and, without admitting or denying any of the findings
contained herein, except those contained in Section III,
Paragraph B, consents to the entry of this Order Making Findings
And Imposing Sanctions Pursuant to Section 9(b) of the Investment
Company Act of 1940 ("Order") providing for the findings set
---------FOOTNOTES----------
-[1]- The administrative proceeding was instituted on
September 29, 1995.
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forth in Section III below and the remedial sanctions set forth
in Section IV below.
III.
On the basis of this Order and the Offer of Settlement by
Mears, the Commission finds that: -[2]-
A. R. Marvin Mears, 61 years old, is a resident of Thousand
Oaks, California. During the period September 30, 1988 to March
31, 1990 ("the relevant period"), Mears was an officer of
Corporate Capital Resources, Inc. and served on its Valuation
Committee.
B. On March 12, 1993, the United States District Court for the
Central District of California permanently enjoined Mears from
future violations or aiding and abetting violations of Section
17(a) of the Securities Act of 1933, Sections 10(b) and 13(a) of
the Securities Exchange Act of 1934, and Rule 10b-5, 12b-20, 13a-
1 and 13a-13 thereunder. Securities and Exchange Commission v.
Corporate Capital Resources, Inc., et al., Civil Action No. 92-
7001 WJR. -[3]-
C. Corporate Capital Resources, Inc. ("CCRS"), was incorporated
in Delaware in 1969 and had its principal place of business in
Westlake Village, California. CCRS is registered as a Business
Development Company ("BDC") under the Investment Company Act; its
securities are registered with the Commission pursuant to Section
12(g) of the Securities Exchange Act of 1934 ("Exchange Act").
From the Company's inception through December 1990, Daniel Weston
served as Chairman of the Board of Directors and President of
CCRS.
D. CCRS' FALSE AND MISLEADING ASSET VALUATIONS
For the periods ended September 30, 1988, through March 31,
1990, CCRS issued financial statements that materially overstated
the value of CCRS' holdings in various portfolio companies
---------FOOTNOTES----------
-[2]- The findings herein are made pursuant to Mears'
Offer and are not binding on any other person or entity
named as a respondent in this or any other proceeding.
-[3]- The U.S. District Court for the Central District
of California permanently enjoined defendants
CCRS, Daniel Weston, Lloyd Blonder and Morris
Lerner from future violations or aiding and
abetting violations of Section 17(a) of the
Securities Act of 1933, Sections 10(b) and 13(a)
of the Securities Exchange Act of 1934, and Rule
10b-5, 12b-20, 13a-1 and 13a-13 thereunder.
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("investee companies"). Each overvaluation was material and
resulted in overstatements of net asset value ranging from 7% to
92%. These materially false and misleading financial statements
were contained in the Company's periodic filings with the
Commission and were used to sell securities to the public.
During the relevant period, Mears served as an officer and
Valuation Committee member of CCRS and was one of the individuals
responsible for setting the valuations of the investee companies.
In at least fourteen instances, CCRS improperly claimed
ownership in investee companies and/or improperly valued these
assets. In four of the fourteen instances, CCRS did not even own
the investee company shares listed as assets. In an additional
two instances, CCRS had breached its obligations under the
acquisition contract and therefore had no legally enforceable
claim of ownership of the subject shares. In another four
instances, CCRS could not claim ownership rights under the
acquisition contract because as of the close of the accounting
period, the contracts were executory. Inclusion of these shares
as "holdings" by CCRS was improper under Generally Accepted
Accounting Principles.
Regardless of whether CCRS' claim of ownership in its
various holdings was supportable, CCRS' valuation "methods" were
improper under the applicable accounting literature and the
requirements of the Investment Company Act. CCRS did not value
its investee company shares at what it could realistically expect
to realize upon their current sale. Instead, CCRS used retail
indications of interest appearing in the National Quotation
Bureau pink sheets as "market quotes", multiplied them times the
number of shares purportedly held and applied a haircut.
The resulting valuations were flawed. First, the pink sheet
indications of interest were not firm as to any quantity, let
alone the millions of shares owned by CCRS. Second, the method
wholly ignored the underlying financial condition and business
prospects of the investee companies. Most were unprofitable
and/or insolvent. CCRS' valuations implied that these companies
had total market values running into the millions of dollars.
The valuations were also suspect because on numerous occasions,
CCRS "acquired" a holding and days later claimed it had a value
several times cost.
E. CCRS' FALSE AND MISLEADING NARRATIVE DISCLOSURE REGARDING
THE VALUATION PROCESS
CCRS' periodic filings with the Commission were also false
and misleading with respect to the narrative description of the
valuation process. CCRS' "Portfolio Evaluation Policy"
("Valuation Policy") was adopted by the Company's Board of
Directors and was contained in all of CCRS' filings with the
Commission during the relevant period. CCRS' Valuation Policy
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called for the Company's Board of Directors to periodically value
the Company's portfolio but noted that, in making its
determinations, the Board could act on recommendations submitted
by its Valuation Committee.
With regard to restricted securities, the Valuation Policy
stated that valuations will be set "in such manner as reflects
their fair value in the opinion of the Board of Directors acting
in good faith." Several specific factors for determining fair
value of restricted and freely-trading securities were
identified. CCRS failed to follow its stated Valuation Policy.
In practice, Weston had sole control over the valuation of
CCRS' portfolio. During the relevant period, Weston served as a
Valuation Committee member as well as Chairman of the Board of
Directors and CCRS' President. Acting alone, Weston drafted and
interpreted CCRS' Valuation Policy.
On a quarterly basis, Weston would prepare an individual
"Investee Company Valuation Review" ("Valuation Sheet") for each
investee company. The Valuation Sheets indicated the number of
shares CCRS owned, acquisition date, cost of acquisition, the
purported "market quote" as of the last day of the quarter,
stated fair value and the stated method used in arriving at the
stated fair value. In theory, the Valuation Sheets were to be
discussed at meetings of the Valuation Committee.
There was little discussion, however, among the Valuation
Committee members regarding CCRS' valuations of investee company
securities. The Valuation Committee did not hold any regular
meetings or conduct any independent research to determine if the
valuations Weston assigned to the holdings in individual investee
companies were in fact fair and reasonable. The Valuation
Committee did not review any documents such as contracts, pricing
information or financial statements of the investee companies.
With only one exception, the Valuation Committee routinely
approved the Valuation Sheets prepared by Weston. These were
then sent to each individual member of the Board of Directors for
approval.
F. THE ROLE OF THE RESPONDENT
CCRS' registration statement and periodic reports held Mears
out as a Valuation Committee member who was responsible for
substantially participating in the valuation process. He
completely failed to do so. There were no regular meetings of
the Valuation Committee, nor did CCRS or Weston supply any
documents to aid in the Valuation Committee's determination of
the fair value of CCRS' holdings in the investee companies. The
Valuation Committee did not conduct any independent research to
determine if the valuations Weston assigned to the holdings in
individual investee companies were in fact fair and reasonable.
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Mears never dissented from a valuation supplied to the Valuation
Committee. Without exception, he merely approved whatever
valuations Weston recommended.
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Mears knew that the narrative disclosure contained in CCRS'
periodic filings was false and misleading. He knew that the
Valuation Sheets contained essentially only the number of shares
owned, the acquisition date and the cost. He knew that CCRS'
periodic reports listed specific factors which were to be
considered in valuing its securities, and that he had not
considered these factors. For example, Mears knew that he had
not reviewed the financial statements of the portfolio companies.
He knew that he was not examining "the proportion of the issuer's
securities which are held by [CCRS] and the ability of [CCRS] to
dispose of large blocks of securities in an orderly manner." He
knew that there was no inquiry made as to "the price and extent
of public trading in similar securities of the issuer or
comparable companies," as stated in CCRS' periodic reports and
registration statement. He knew that he never asked for or
reviewed "special reports prepared by analysts" or "information
as to any transactions or offers with respect to the security,"
as further described in CCRS' filings with the Commission and in
fact, that he did not even meet to discuss the valuations
prepared by Weston.
Mears also knew that the valuation figures were
insupportable. Even with the limited information contained in
the Valuation Sheets, Mears knew that CCRS was acquiring holdings
on one day and then valuing them at huge multiples days later.
Nonetheless, Mears approved the quarterly valuations which
appeared in the Forms 10-Q. Mears' failure to substantially
participate in the valuation process resulted in the issuance of
false and misleading Forms 10-K filed with the Commission as well
as a false and misleading registration statement which was used
to sell CCRS' shares to the public.
In view of the foregoing, Mears willfully:
1. aided and abetted CCRS' violation of Section 17(a) of
the Securities Act of 1933;
2. aided and abetted CCRS' violations of Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder;
and
3. aided and abetted CCRS' violations of Section 13(a) of
the Securities Exchange Act of 1934 and Rules 12b-20, 13a-1 and
13a-13 thereunder.
IV.
Based upon the foregoing, the Commission deems it
appropriate and in the public interest to impose the sanctions
specified by Mears in his Offer.
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Accordingly, IT IS HEREBY ORDERED that, effective
immediately, Mears be, and he hereby is, barred from association
with any investment adviser or investment company.
For the Commission, by its Secretary, pursuant to delegated
authority.
Jonathan G. Katz
Secretary